Why Yahoo's Investment in Snapchat Is a Smart Move for Both Parties

13/10/2014 15:26 BST
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Updated
10/12/2014 10:59 GMT

Having famously spurned offers from Facebook and Google, rumor has it that Snapchat is finally about to succumb to one of its many suitors - with Yahoo expected to make a cash injection which values the company at $10 billion.

If the deal goes through, Snapchat will join a long list of names which have been acquired or seen major investments during 2014 - including WhatsApp, Twitch, Mojang and Viber. But while all of these other digital companies were snapped up for pretty obvious, and mutually beneficial, reasons, the potential match between Yahoo and Snapchat seems rather more one-sided. We know why Yahoo would want to acquire Snapchat; it's less immediately obvious why a company which has previously played so hard-to-get would now choose Yahoo as its investor.

Among the key teen demographic, Snapchat remains a thorn in Facebook's side. In the US, which is still Snapchat's most successful market, over 40% of 16-19s are using the app - three times the national average. Crucially, that puts Snapchat ahead of Facebook's WhatsApp and Messenger services. And it's a similar picture in other big digital markets too: teens in countries like the UK, Canada, Sweden and Australia are also avid Snapchatters. More than any other factor, this is why Snapchat keeps grabbing headlines: it's doing well among the most hotly monitored demographic in the most closely observed markets.

Snapchat also continues to benefit from not being a Facebook product. While people are not deserting Facebook in their droves, as sometimes claimed, a pronounced anti-Facebook sentiment is not hard to find. Just look at how easy it was for new network-on-the-block Ello to generate massive hype, and how quick the media was to label it the "anti-Facebook". Facebook's membership and visitation rates might be as strong as ever, but there's no doubting that many users no longer think it's terribly "cool".

So, Snapchat holds all the cards, right? Well, not quite. Look a little more closely at Snapchat's numbers and there are more benefits from a Yahoo investment than you might first think (other than the obvious fact that Yahoo is attaching a much higher value to the company than Facebook did).

Overall, Snapchat's current usage levels are actually pretty modest; outside of China, just 7% of the global mobile internet audience are using it. That places it (considerably) behind a number of its competitors, including WhatsApp (39%), Facebook Messenger (38%), Viber (11%) and even LINE (9%). It's growing pretty slowly, too - up just three percentage points over the last year.

Arguably, Snapchat's huge popularity among teens in a few markets is also a potential weakness. Evan Spiegel might have thought that Facebook's $3 billion offer wasn't high enough, but one of the main reasons why WhatsApp commanded a much higher $19 billion was its strong usage levels in a wide range of fast-growth markets; more than three quarters use it in countries like South Africa, Argentina and Malaysia, and WhatsApp can also boast appeal across a broad range of demographics. In contrast, Snapchat enjoys strong engagement rates only in a handful of Western markets among young audiences. And we know just how fickle this segment can be; Snapchat might be the "coolest" app in the space at the moment but, if that were to change, it could find itself in quite a vulnerable position. Potential exposure to Yahoo's audience could boost its membership base considerably.

It's not just that Snapchat needs to increase its digital footprint, though. It also needs to find some revenue streams. The impending introduction of adverts will help with this, but Spiegel has already stated that they will be opt¬-in, will be part of the Stories feature and will not interrupt normal messaging. Snapchat simply doesn't want to become an ad-supported platform in the same way as a network like Facebook. And that's where Yahoo - and its stream of content as well as services such as Summly and Tumblr - could prove very useful, especially as Snapchat has been developing its new Discovery feature to allow people to engage with videos and articles. It's this sort of content in which advertisers are likely to be much more interested - leaving Snapchat's original reason-for-being, its messaging function, as a largely ad-free space.

Ultimately, then, this is a deal which would work for both sides. Snapchat becomes more attractive from an advertising perspective, while Yahoo gains more of a presence on mobile as well as access to a young, trend-setting audience. It's also more evidence of how social networks are evolving; just as Facebook is looking to become more of a service provider through its new payment feature on Messenger, so Snapchat is eyeing up the content-hub space. To flourish in tomorrow's digitals landscape, networks are moving beyond just being social.